What Is the Liquidation Reserve?

I just borrowed USDL…

Why do I have 200 USDL less than expected?

This is because of the Liquidation Reserve.

What is the Liquidation Reserve?

The Liquidation Reserve is 200 USDL that is set aside when you open a Vault and take out a loan. 

The reserves are paid out to the liquidators in order to cover the gas fees and to provide an incentive for those who perform the service of closing out vaults under 110% collateral ratio.

But don't worry - if your Vault avoids liquidation, the full Liquidation Reserve is refunded back to you when you close your Vault by repaying the debt.

The Liquidation Reserve does count toward your debt amount used to calculate the collateral ratio. 

This slightly increases the collateral required to maintain the target ratio as a form of protection.

Why is the Liquidation Reserve Important?

The Liquidation Reserve provides a strong incentive for users to perform the liquidation function within the protocol.  

The health of the Liquid Loans protocol is contingent on there being EXCESS VALUE OF PLS in the vaults compared to the USDL minted as debt.

Therefore, every vault under 110% collateral ratio must be promptly closed out to ensure overcollateralization.

This becomes even more important, when the price of PLS inevitably drawbacks in a swift fashion.

The Liquidation Reserve ensures that it is in the best interest of everybody to close out undercollateralized vaults.

The Bottom Line

If you love PulseChain, then you love a fully-backed, censorship-free decentralized stablecoin. 

This is exactly what USDL is.

In order to have this, however, we need to make sure that the Total Collateral Ratio of Liquid Loans remains high.

The Liquidation Reserve is one such feature that ensures this overcollateralization.